Stuck in the Saving Then Spending Then Saving Then Spending Cycle
I approached my 30s in a constant state of limbo, saving then spending the same $2,000 over and over again with no actual savings to show for it. I figured there must be a better way to put money away for my future. At the rate I was going, retirement was a fantasy. Fairly recently, I discovered the difference between savings and investment accounts.
It changed my perspective.
I realized I had been missing out on an opportunity to grow my money for way too long.
A common misconception is that to invest money, you need to be wealthy.
So many hardworking, honest people humbly stash away any savings they can manage into bank savings accounts, lock boxes, or even under the mattress.
I was guilty of this practice for many years, being generally distrustful of all financial institutions.
After a little internet research and financial education, however, I realized investing was no longer unattainable for the common folk – for families like yours or mine.
Once I learned the difference between investment and savings accounts, I discovered quite the opposite.
In fact, it can even be surprisingly easy.
Difference Between Investment And Savings Accounts
Most people have a basic idea of the purpose of a savings account. They’re available from pretty much every bank.
And although most people have heard of investment accounts, many don’t know much about them. Or, at best, they know just the bare bone basics.
Let’s have a look at the difference.
A savings account is usually offered through a bank or credit union and allows you to accumulate interest on the money you deposit.
Seems like a sound plan to save and grow your money, right?
Unfortunately, many people don’t realize these traditional bank savings accounts will RARELY offer more than a 1% yearly interest rate.
The average is closer to .1% and as low as .01%.
For regular people who aren’t able to put away large sums of money, that literally equates to meager pennies of interest earned each year.
When you account for inflation, your yearly returns are completely negated.
The emergence of online banking institutions has made a big difference in the savings account sector, offering interest rates in the 2% range.
Check out some of the best options here. These types of accounts offer a safe, low risk investment, but you really limit your earning potential.
Investment (aka brokerage) accounts, on the other hand, have unlimited potential for growth if you make educated investments.
Instead of loaning your money to the bank with a savings account, you are buying stock in companies that you feel confident will grow.
In a way, it’s kind of like a legal form of gambling. If the company you “bet” on succeeds, you can accumulate some serious cash.
For example, think of how rich you would be right now if you had invested in Amazon stock back in 1995.
There are several types of investment options to choose from depending on your financial goals.
An investment account can be offered through banks, traditional brokerage firms like Charles Schwab or Fidelity, or even online brokerages. You can hand pick your own stocks and stock portfolios, or have a financial advisor manage them for you.
There are even robo-advisors these days!
Don’t get me wrong. I think savings accounts are GREAT for putting back funds for emergency expenses. Always try to maintain a minimum of $1,000 of accessible savings.
However, if you really want to put your extra money to work for you, the difference between investment and savings accounts is staggering.
How To Start Investing
The first thing you need to do is ask yourself WHY you are investing.
Hopefully, you are saving for retirement. Just in case, we’ll start by talking about retirement savings.
Many people believe that Social Security benefits or a work sponsored retirement plan like a 401k is all they will need.
The cost to get old in America is on the rise. People are living longer and healthcare continues to get more expensive.
Unfortunately, the average person will not have enough money to retire and maintain their current standard of living.
Individual Retirement Accounts
It’s never too late to start an investment strategy, and a Roth IRA is hands down your best choice.
IRA stands for Individual Retirement Account.
This is the type of account you need to drop your money in and forget about for the next 20-30 years.
Let the magic of low risk investment plus compounded interest do it’s work and thank me later…
Roth IRAs allow you to contribute up to $5,500 per year to investment options of your choice. Once you are over 50, that limit increases.
One of the major benefits of this type of retirement account is that your earnings and withdrawals are tax free.
This is what initially sold me on my investment journey.
Most companies offer great mutual funds tailored to your projected retirement date.
Mutual funds take the guesswork out of choosing investments. They are diversified collection of stocks and bonds that are professionally managed and usually average around a 6% return.
The younger you are when you start investing in your IRA, the more money you will earn.
Let’s say you are a little late getting started like I was.
At 32 years old, if I make the maximum contribution of $5,500 per year until I retire at age 67, I will have around $650,000 saved in my retirement account.
On the other hand, if I stick that $5,500 under my mattress every year instead, I will only have a total of $192,500.
See the magic? Try your own calculations here.
The only drawback is some companies require $500 or more to open the account, but big brokerages like Charles Schwab will waive their minimum IF you sign up for at least $100 a month in automatic investments.
Want to make investments but don’t have that kind of cash? Read on.
But what if you want to invest in something other than retirement?
After opening my first Roth IRA with Fidelity, I realized there were so many options and so much potential with investing.
Initially, I opened a brokerage account in addition to my Roth IRA, but soon discovered playing the stock market solo was time consuming and expensive. Definitely not something I could squeeze into my family’s evening routine.
Enter the wonderful world of Micro Investing.
These app based platforms have removed the barrier between the working class and investment opportunities and made stock trading attainable for poor folks like me.
Acorn and STASH are two of the most popular apps. (These companies aren’t open to Canadians, however, you can read about a couple that are HERE and HERE) I have tried them both and prefer STASH. Find out why on my blog HERE.
Both platforms require a paltry sum of $5 to get started, and if you know someone with one of the apps, the company will give you that $5 free! You can use my referral link for STASH here to get your $5 now.
These apps offer portfolios of stock based on risk assessment and personal interest.
I prefer STASH because they have a much nicer variety of portfolios, and they have also recently added individual stock options for major companies like Amazon.
Buy A Slice Of The Pie – Or Just a Few Crumbs
Instead of buying a whole share of stock (aka a personal slice of the company pie), which is quite expensive to purchase from the most lucrative companies, micro investing apps let you invest in fractional shares (aka the crumbs left on the plate).
If you pick up enough crumbs, you will eventually get a whole piece… Am I right?
Micro investment apps are also a fantastic financial education tool. It is a great way to familiarize yourself with the stock market and investing if you are clueless like I was when I started. You can even fit it into your morning routine since it doesn’t take nearly as long as regular stock trading.
Obviously, it is going to take a while to accumulate wealth this way.
However, if you set firm investment goals and LEAVE YOUR MONEY in the account long term, you WILL earn some very nice interest.
Last year, I made $150 on $1,500 in Micro Investments with STASH.
That’s a 10% return.
Now I can turn around and re-invest that money in STASH, OR pull it out and start using my gains to invest in WHOLE slices of that stock pie.
See how this works?
You’ve got to start somewhere.
Whatever choice you make to start saving for the future, do it now.
The sooner you get started, the more your money will grow.
If you want a detailed course to guide you to teach you and your children everything you need to know about finances, check out Family Money School. It provides lessons that walk you through each piece of information and outlines how to teach your children about all aspects of money management.
Lessons use real life and engaging activities to keep your children focussed and to maximize learning. The biggest benefit is that you get to learn alongside your kids.
Have you begun saving and investing? Have you set up an investment fund for your child’s post secondary education? Retirement? I’d love to hear about your investment experiences in the comments below.